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Capella Education (CPLA) Beats on Q1 Earnings; Stock Up

Shares of Capella Education Company CPLA increased 5.75% on Apr 26 after the post-secondary education provider reported solid results for the first quarter of 2016 and provided an optimistic outlook for the second quarter of 2016.

Capella also said it acquired Hackbright Academy, one of the leading software engineering schools for women, on Apr 22.

The education company’s first quarter earnings of 86 cents per share surpassed the Zacks Consensus Estimate of 81 cents by 6.17%. However, earnings fell 2.3% year over year, owing to soft revenue. 



Revenues and Enrollment in Detail

Capella’s quarterly revenues of $105.4 million missed the Zacks Consensus Estimate of $106 million by 0.5%. Revenues inched down 0.2% from the year-ago level, within the company’s expectations of flat to down 1%.

The revenue decline was due to unfavorable degree mix shift and change in accounting for revenue recognition. The said change is applicable to learners who withdrew from Capella University with an outstanding balance. All these headwinds were partially offset by an increase in total enrollment and tuition hike of about 2% implemented in Jul 2015 for Capella University.

Total active enrollment of 38,503 was up 2.6% from the prior-year quarter. The enrollment growth rate slightly exceeded the company’s projected range of 1.5%–2.5%.

Total active enrollment increased during the first quarter owing to improved early-cohort persistence and higher percentage of returning learners. Early-cohort persistence improved 2% during the first quarter driven by the company’s focus on learner’s success. Total enrollment was also driven by an increase in enrollment in FlexPath programs.

New enrollment dropped 3.7%, missing the company’s expectation of a slight year-over- year decline. However, new enrollment decline was narrower than a 15.3% decline reported in the prior year quarter.  The decrease was due to weak enrollment across all programs except doctoral programs. Doctoral programs reported strong increase in new enrollment.

Costs and Margins

Capella’s operating income dropped 6.3% year over year to $16.5 million. Operating margin decreased 100 basis points (bps) to 15.7%, owing to soft revenue. However, operating margin surpassed the expected range of 14.5–15.5%. As a percentage of revenue, bad debt expense of 1.8% during the quarter improved 120 bps year over year.

Second Quarter 2016 Guidance

Capella provided guidance for second quarter 2016, wherein it excluded the impact of the Hackbright acquisition and its post acquisition operating results. Consolidated revenues are expected to be flat to up 1%. The company expects new enrollment to increase slightly year over year. Total enrollment is expected to increase about 1.5% to 2.5% on the back of strong persistence.

Consolidated operating margin is expected to be about 17% to 18% during the quarter, compared with 17.3% in the prior year quarter.

Hackbright Academy Acquisition and Other Update

Capella acquired Hackbright Academy, a provider of non-degree software engineering, for about $18 million. The company expects Hackbright Academy to contribute to revenue increase by a point in 2016.

The acquisition is in line with the company’s strategy to focus on non-degree programs. Employers are facing difficulty in hiring skilled workers in the U.S. The actual problem lies in the gap between skills required and the skill-set offered by the workforce. Capella intends to capitalize on this gap and is therefore planning to invest in non-degree programs in 2016. In fact, the company is in the process of divesting Arden University in order to focus more on non-degree programs.

Zacks Rank & Key Picks

Capella currently carries a Zacks Rank #3 (Hold).

Investors interested in the consumer discretionary sector can consider American Public Education, Inc. APEI, New Oriental Education & Technology Group Inc. EDU and Lincoln Educational Services Corporation LINC. While American Public Education and New Oriental Education & Technology Group sport a Zacks Rank #1 (Strong Buy), Lincoln Educational Services holds a Zacks Rank #2 (Buy).

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